Q1 2022 Kaiser Aluminum Corp Earnings Call
Good morning, and welcome to the first quarter 2022 earnings Conference call. My name is scenario and I'll be the operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a core.
Chen Please present zero one on your Touchtone phone I'll now turn the call over to Melinda Ellsworth Melinda you may begin.
Thank you good afternoon, everyone and welcome to Kaiser Aluminum's first quarter 2022 earnings Conference call. If you have not seen a copy of our earnings release. Please visit the Investor Relations page on our website at Kaiser aluminum Dot com.
We have also posted a PDF version of the slide presentation for this call.
Joining me on the call today are president and Chief Executive Officer, Keith Harvey Executive Vice President and Chief Financial Officer Neal West.
And Vice President and Chief Accounting Officer, Jennifer Huey before.
Before we begin I'd like to refer you to the first three slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward looking statements are based on management's current expectations for.
For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward looking statements. Please refer to the company's earnings release and reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the full year ended December 31 2021.
The company undertakes no duty to update any forward looking statements to conform the statement to actual results or changes in the companys expectations.
In addition, we have included non-GAAP financial information in our discussion reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation.
Reconciliations of certain forward looking non-GAAP financial measures to comparable GAAP financial measures are not provided because certain items required for such reconciliations are outside of our control and cannot be reasonably predicted are provided without unreasonable effort.
Any references in our discussion today to EBITDA means adjusted EBITDA, which excludes non run rate items for which we've provided reconciliations in the appendix.
At the conclusion of the company's presentation, we will open the call for questions I would now like to turn the call over to Keith Harvey case.
Yeah.
Thanks Melinda.
Good afternoon, everyone and thank you for joining us and a review of our first quarter 2022 results.
Turning to slide six.
Adjusted EBITDA for the first quarter of 2022.
$55 million reflected a continued strong demand environment for our general engineering and packaging products and as expected.
<unk> steadily increasing demand for our aerospace products, which experienced the highest shipments and value added revenue. We've produced since the second quarter of 2020.
Automotive demand remained in neutral as shipments and value added revenue remained relatively flat to previous quarters due to the continued shortage of semiconductor chips for North American automotive and light truck production.
Value added revenue per pound improved sequentially across the board in all product categories as our commercial teams have been successful in passing through rising metal freight energy and other costs.
Even with the success, we've had to date and offsetting these costs, we are continuing to see rising cost in almost all materials and services will utilize.
First quarter results reflect approximately $6 million of unusual freight costs incurred at our truckload operations, where we experienced higher than normal export shipments in the quarter.
When ports and rail systems generally utilize the transfer of these products.
<unk> significant disruptions during the quarter, we utilized less efficient means of shipping material on an interim basis to meet needed deliveries for our customers.
As I noted during our February earnings call, we expected efficiencies to continue to improve that most of our facilities in 2022.
These improvements have generally begun to be realized including at those facilities focused primarily on automotive.
They have continued to successfully pivot to servicing the unprecedented general engineering demand.
However, as demand for packaging products remains quite strong.
Lingering supply chain issues regarding the availability and timely delivery of metal and magnesium continued to negatively impact efficiencies at the Warrick operations.
We believe the actions we have taken will significantly reduce the impact of these conditions on our business going forward.
Integration of the award packaging business continues with completion of our final temporary service agreement with Alcoa expected sometime in the second quarter.
Looking at the larger global environment, the company is well positioned.
With the exception of aerospace our markets are heavily north American centric.
We have multi decade relationships with our blue chip customers and have strategic long term contracts and most of our markets.
Our supply base for the most part is well diversified and we will continue to work to improve these positions.
While historically, a small percentage of our primary aluminum requirements have been produced in Russia.
A small portion of our requirements is now being sourced elsewhere.
In addition, we have expanded and qualify other sources to diversify our supply over time to reduce our heavy dependency of Mag from one supplier.
The company maintains a conservative capital structure.
And while we are focused on supporting the strong secular growth anticipated in all of our major markets. We will continue to manage our business as we have in the past by maintaining strong discipline and our use of capital continued focus on debt leverage reduction.
To targeted levels.
And relentless focus on managing cost.
Neil will now discuss the first quarter results in more detail and I'll follow up afterwards on our outlook for the balance of the year Neil Thanks Keith.
Good afternoon, everyone turning to slide eight.
Value added revenue for the first quarter of 2022 of $370 million increased by $199 million or 116% compared to the first quarter of 2021.
Primarily reflecting the inclusion of our packaging business acquired on March 31, 2021.
Which contributed $146 million to value added revenue during the first quarter of 'twenty two.
On a sequential basis.
Value added revenue increased approximately 17%, reflecting pricing initiatives implemented in the latter part of 2021 to offset the impact of rising metal freight energy and other costs to date.
Value added revenue for our Aero high strength applications improved to 95 billion.
35% on a 26% improvement in shipments from the first quarter of 'twenty one.
We continue to see improvements in demand for our commercial aerospace applications, along with the continuing strong demand in business Jets and defense applications.
On a sequential basis, our first quarter of our improved $13 million or 16% from the fourth quarter of 2021 on the 7% improvement in shipments, reflecting improving demand and higher price, reflecting the pass through of inflationary costs.
Our general engineering value added revenue was up to a record $102 million for the first quarter of 'twenty, two up $31 million or 43% from the first quarter of 2021 20.
23% increase in shipments.
The increase in value added revenue and shipments reflect improvement in pricing and strong demand for our general engineering applications driven by restoring plate used in tooling in semiconductor applications and the strength in our North America General industrial market.
First quarter 2022 value add revenue was up $29 million or 40% on a 23% increase in shipments over the fourth quarter of 'twenty one.
Automotive value added revenue.
$24 million in the first quarter of 2022 down approximately $4 million on a 14% decrease in shipments sequentially automotive was flat compared to the fourth quarter of 'twenty. One as a result of the continuing semiconductor chip shortages and other supply chain issues impacting.
The North America automotive production.
As previously noted value added revenue for our packaging applications was $146 million in the first quarter 'twenty to <unk>.
Increasing $15 million sequentially.
Or 11% compared to the fourth quarter of 'twenty, one are relatively flat shipments, reflecting improvements in pricing to pass through the higher cost.
Additional details on value added revenue and shipments by end market applications can be found in the appendix of this presentation.
Moving to slide nine.
First quarter 2022, adjusted EBITDA of $55 million increased $18 million or approximately 47% compared to the first quarter of 'twenty one.
Flex into higher value added revenue as discussed and reflecting operating and overhead costs related to the work acquisition.
On a sequential basis.
Adjusted EBITDA is up $9 million or 20% over the fourth quarter of 'twenty one.
Adjusted EBITDA for the first quarter of 'twenty, two compared to the fourth quarter of 'twenty. One reflects higher value added revenue offset by the $6 million of incremental freight costs as noted earlier by key and continuing improving manufacturing inefficiencies at our work operations due to the supply chain and integration.
Distractions.
For the first quarter 'twenty, two we reported a 14, 8% EBITDA margin down from the 21, 8% in <unk> 'twenty, one, but up slightly from the 14, 5% in the fourth quarter of 2021.
Moving to slide 10.
Reported operating income for the first quarter 2022 was $25 million.
Adjusting for approximately $2 million of non run rate items, adjusted operating income was $28 million up from $24 million in the prior year quarter, primarily reflecting the change in EBITDA as previously discussed.
<unk> by an additional $14 million depreciation and amortization expense predominantly related to the wharf acquisition.
Reported net income for the first quarter of 2022 was $8 million.
Compared to $5 million in the prior year quarter.
Adjusting for non run rate items adjusted net income for the first quarter 2002 was $11 million, which was comparable to the prior year quarter.
As reported earnings per diluted share were <unk> 51 in the first quarter of 'twenty, two compared to <unk> 66 in the prior year quarter.
Adjusted earnings per diluted share were <unk> 66.
And 64 in the first quarter 'twenty, two and 'twenty one respectively.
Our effective tax rate for the first quarter 'twenty two was 29%.
The increase in the expected effective rate was primarily driven by 123, our stock based compensation.
For the full year and long term, we continue to believe our effective tax rate will be in the mid 20% range under the current tax regulations.
We anticipate that our cash tax rate will remain in the low single digits until we consume our federal Nols of approximately $187 million as.
As of year end 2021.
As of March 31, 2022, we had $260 million $261 million of cash and cash equivalents.
On April seven we completed an amendment to our revolving credit agreement, increasing the commitment of the facility from $375 million to $575 million and extending the maturity to April 2027.
Total availability under the amended revolving credit facility was $563 million <unk>.
Providing total liquidity of $824 million.
There were no borrowings under the revolving credit facility during the quarter and the facility remains undrawn.
And now I'll turn the call back over to Keith Keith Alright, Thank you Neil.
Turning to slide 12, and looking out the balance of 2022.
Aerospace shipments and value added revenue continued to improve in the first quarter due to strengthening demand from all end customers and defense business Jets and commercial aviation.
Shipments increased 7% in value added revenue increased 16% from fourth quarter of 2021.
We continue to anticipate value added revenue growth up 15% to 20% year over year as discussed in our February call.
Our anticipated recovery of the commercial aviation market is on track.
And we continue to be well positioned to participate in that recovery.
As noted we incurred significant transportation cost in first quarter due to multiple transportation bottlenecks for export of aerospace products from our truckload operation.
But the cost associated with these issues have been largely resolved.
Turning to slide 13.
We had a solid quarter and the general engineering market to start the year.
Value added revenue increased 40% over our fourth quarter results and 43% over our first quarter 2021 results, which were considered quite strong.
And while we always expect seasonality to typically drive stronger results in the first quarter in general engineering.
The strength of this market continues to impress.
Our teams have done a great job in improving spreads per pound and providing additional capacity to meet the higher demand.
And we are well positioned in the market with our broad product offerings.
While it is uncertain that the markets will maintain the torrid pace experienced in the first quarter for the balance of the year. We now believe value added revenue growth will conservatively be closer to the high end of the approximately 10% to 20% increase year over year 2020.
One reflected in our prior outlook.
Turning to slide 14.
Automotive shipments and value added revenue remained relatively flat sequentially.
We continue to expect accelerated improvement for both shipments and value added revenues towards the end of the year as semiconductor chips become more available, allowing stronger north American automotive and light truck production.
In addition.
Interest in new applications utilizing our extrusion products continues to grow and we are quoting on multiple new programs.
The outlook continues to be favorable for secular growth in demand for these applications.
We reiterate our outlook on expected shipments and value added revenue up 10% to 20% in 2022 versus the prior year.
Turning now to slide 15.
Our outlook for the packaging business continues to be very strong in terms of demand and secular growth.
As we noted during our February earnings call.
We anticipate value added revenue growth.
Of 35% to 40% year over year.
Reflecting the benefit of four full quarters of sales and improving price and mix.
We reiterate our outlook for these applications for the balance of the year.
In addition, we have continued to successfully secured additional long term contracts with favorable terms with strategic customers for supply positions for higher margin products.
As we have discussed.
Ongoing supply chain issues with specific focus on metal supply and magnesium supply have continued to impact our packaging operations.
<unk> is a large consumer of magnesium as a large portion of our production is utilized for COVID-19 food can and beverage lid and tab applications.
These products use alloys with relatively high magnesium content as compared to alloys used to fabricate beverage can body applications.
Our main supplier U S. Mac declared force majeure in September of 2021.
And we have been on allocation below our contracted volumes since that time.
We have worked diligently to minimize any impact to our customers from this event.
Including securing additional magnesium where we could.
At cost considerably higher than our contracted agreements.
To date, we have met all obligations to our customers and we continue to work all options in order to continue to do so as we pursue the resolution of our issues or concerns with U S. Max.
Turning now to slide 16.
And finally.
An update on comments from our February call regarding planned increased major maintenance spending.
Our large stretcher outage in third quarter of 2022.
And the phase <unk> expansion project discussed for <unk>.
We expect incremental major maintenance spending in the second quarter versus the first quarter.
Approximately $8 million to $10 million.
To support planned project at projects at several facilities, including casting equipment and facility reconditioning.
This spending is in line with our outlook given in February for full year 2022 expected major maintenance spending of approximately $40 million.
We are preparing for a multi week outage at our <unk> facility beginning in July for reconditioning and upgrades to our heavy gauge stretcher.
As previously discussed this investment is in lieu of a previously planned purchase of a new structure announced prior to the pandemic.
These actions have been included in previous outlooks and represent no change from previous discussions.
With respect to the previously discussed phase seven expansion project at our <unk> Rolling Mill, which will increase capacity for aerospace and general engineering plate.
No decision has been reached for when this project will launch and no spending is planned at this time.
We will continue monitoring market conditions and evaluate appropriate timing to launch this next phase of growth at the <unk> facility.
Now.
Turning to slide 18, and a summary of today's comments.
Our first quarter results reflect continuing strength in our major markets with considerable strength in our packaging and general engineering markets steadily improving aerospace demand.
And continued supply chain issues around semiconductor chips for automotive and light truck production.
We continue to aggressively address inflationary conditions as well as continuing supply chain challenges to mitigate higher costs and disruptions in our businesses.
We expect EBITDA margins to continue to improve strengthening through the year and continue to anticipate margins for the full year of 17% to 20%.
As operations and efficiencies improve cost normalize and commercial conditions commercial conditions further improve.
I will now open up the call to address any questions you may have from our remarks today.
And our.
Thank you we will now begin the question answer session.
If you have a question. Please press zero one on your Touchtone phone, if you wish to be removed from the queue. Please press zero too.
If youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please present zero one on your Touchtone phone.
Waiting on standby for any questions.
And our first question comes from Emily Chang from Goldman Sachs. Please go ahead.
Good afternoon, Keith and Neil and thank you for the update today.
My first question is just around some of the changes that you're seeing in the value added revenue on a dollar per pound basis, and we've seen a little bit of a step change and improvement specifically.
Specifically on the Aero and high strength side on the packaging side.
And maybe let's start with the Aero and high strength piece of it it looks like the $2.09 per pound is higher than what you've been able to achieve.
Even in the past. So first question I guess is really curious whats driving that or if that's a function of a mix shift.
And the volumes.
Certainly well good afternoon Emily.
The change that we're seeing really across the board on all of our products reflects the focus that we've had on ensuring that we pass through these costs.
Effectively as we can.
It also demonstrates some improvement in the demand area, but which we're able to.
Pushed through some additional price increases as well as some improvement on a mix of whether or not that $2. Nine will continue beyond the first quarter not necessarily short will be at that same level, but certainly in that same area.
As we demonstrated very good success in passing through these costs and improving demand. So I'm hopeful that we're going to be continuing to see these these improvements continued throughout the year, especially as we continue to incur additional cost.
Through this through the through the system.
Great that makes a lot of sense.
And then maybe shifting gears to Warwick and it seems like there is still a couple of.
Supply chain impacts that are impacting that facility that but maybe can you discuss what actions have been taken to mitigate some of these and is there a line of sight or.
<unk>, which we should.
Think about <unk>.
These issues should be.
Over by then.
Well.
We've called this out to the last two or three quarters and quite frankly.
Tired of speaking to all of those issues, we are making headway.
We're making headway with our hot metal supplier Alcoa.
In the past.
The rolling mill and the smelter.
Were owned by the same.
Person and when you have two separate owners there are expectations on performance that perhaps weren't there in the past.
We've had a lot of dialogue and a lot of focus on actions to improve that performance from the smelter to the operations. So that we get timely delivery of materials that don't negatively impact the efficiency of the operations that's truly what we've done there. So we've taken some significant actions in the first.
Quarter, we expect to see some improved results from that beginning in the second quarter going forward.
With regards to our issue with the supply of Mag.
We've been very frustrated in this area, we're now in our seventh month.
We were dealt with our major supplier force majeure and.
We to the point, we filed a complaint last week in the Federal Court in New York.
The issues around U S Meg and their force majeure. There are three issues. We at one is whether or not U S. Mag was entitled to declare force majeure.
There was a failure to maintain a safety stock according to our contractual agreements and then finally U S. Max conduct since declaring force majeure.
Very frustrating for us for the lack of communication and follow through on performance and so we're going to take those additional measures now I'd have spoke in the past about actions that we have taken to minimize those and those are being put into effect.
Regardless of our outcome.
In the <unk>.
Position with U S. Mag a few of the things that we have done in that area. We have diversified our supply base, that's taken a little bit of time, given the global scenarios that are in place today, but we have diversified that supply position and we think that'll improve over time and the other steps that we've taken.
And we have been.
Going back to our customers and changing out the timing of which we have the ability to recoup these costs and I would remind everyone. We do have provisions in our contracts that will allow us to recoup these higher costs and we are doing so but that doesn't have that has.
Impact later right now we're dealing with those costs at hand, so I'm very pleased with the with the actions we've taken to reduce the impact on a quarterly basis are those costs. However, these costs are going to continue to be focused and we're going to ramp up our our performance of our actions there too.
Finalized where we are here and move forward.
Understood that makes sense.
If I may.
I will just squeeze in one more just on the margin environment.
The value added revenue margin expectation of 17% to 20% for the full year.
I know the first quarter margins, a little below that that 17% range, but.
What do we need to see for you guys to to reach that target.
Margin environment is it.
Resolution of some of the challenges that were experienced in truckload.
Or is it just.
Steadily improving end market demand.
As an aerospace industry I'll leave it at that thank you.
Sure.
The impact that we have.
<unk> reduced our margins a couple of percentage of Cups couple of hundred basis points. If you will roll back end at $6 million of.
Cost that we had there are only so.
I think it was maybe artificially lower in the quarter than what we had expected.
But to give it the bigger point.
With us here is we're seeing really strong demand and the ability to move cost and perhaps even spreads up higher in all of our businesses. The answer on our on our EBITDA margin performance really evolves around the cost the cost piece, especially as that we're experiencing at the warrick operations. So what.
Those actions that I outlined to you on your earlier question.
I have a strong.
Belief that our margins will return back on the.
Path that we have outlined and certainly the topline growth and what we're experiencing with customers or demonstrate that we have the capability to do so and if we can normalize some of these costs that we've been experiencing I really think that we're back on track with where we are.
Outlined to the market.
Great. That's very helpful. Thank you.
Thanks Emily.
Thank you. Our next question comes from Josh Sullivan from Benchmark. Please go ahead.
Hey, good afternoon.
Hi, John .
In aerospace what are you seeing as far as OEM pulsing demand through the supply chain are those pulses in excess of current build rates yet.
No.
<unk>.
I think there is still a good bit of material I think there is some destocking thats continuing right now Josh.
But we're starting to see that that come to an end.
We're getting good pull from the large commercial aviation folks and that's a positive sign that has been the missing link that we've been waiting to incur even though we've been recovering on quarterly shipments in aerospace a good bit of that has been driven by defense.
And the business Jets that we talked about in previous quarters that continues that's good news, but the real good news is we're starting to see some of that pull coming from the large Oems.
We were initially concerned that other supply chain issues not materials related to aluminum, but things like perhaps titanium or others may have a bearing on that pool.
We're not experiencing that and our OEM customers are quite frankly relatively comfortable with where they are with the positioning I think what theyre looking at right now is that expected build rates back in the 'twenty three 'twenty four time frame they want to ensure.
But the supply base is strong enough strength and positioned to support those higher rates when we get to that period.
And that's what we're all working towards we're seeing really good pull not just for the first four broker starting to see that open up as expected for the balance of the year. So I think were on that road to recovery, we're still dealing with some of these things like the Ukrainian.
Crisis, and some of the other things and I'm sure they'll have little blips in the road, but but.
Our customers are beginning to talk about the recovery and we're starting to see orders began to support those higher rates.
Got it and then just on the on the defense side of that do you.
The international demand could the Chad stuff is going to fill the gap between what the OEM has announced production rates versus what the U S. Vod.
Requested in the 'twenty three budget.
Absolutely.
And I'm not sure but.
I think the the hole that was put into the program may be there to allow for continued growth for J ASF, where the NATO partners.
We saw two or three major program commitments moving over to support the <unk>.
We have Canada was the most recent that came over in favor of the F. 35. So so we believe that that's going to continue to be enhanced.
I also think other things on the defense spectrum that we cover like munis.
Munitions and other things, we expect to see fairly strong demand results from that as well. So I think defense is going to become a growing opportunity.
From a demand perspective.
Got it.
And then just lastly on general generic I mean.
Pricing sustainable I know you indicated that these are some pretty high levels, but.
Just curious how much of it do you think is transitory versus what's really structural.
Well, it's an interesting time Josh.
Again demand is unprecedented we actually have the capacity to meet this demand we saw stronger demand in the 2019 time level.
But arrow was so strong at the time, we werent able to secure all of that we're seeing now.
Number of factors that are going on in the world and whether or not those continue.
We believe that re shoring is one of those that is becoming a more permanent fact.
As it relates to the North American market.
And that's going to drive some significant long term growth now I will say, whether or not we continue to see and I use the word tore it in my in my comments for a reason.
In my history, I've never seen it this strong I've never seen.
The opportunities and the pricing environment the way it is.
I believe over time that from the conservatism this that we take into account.
Not sure that those types of prices will maintain a long time, but but for now that demand is real we're not seeing.
Inventory levels at our service center customers really go beyond more than what they've had normally and this time. So there is no big build of <unk>.
Restocking, that's taking place so for the most part. This is this is true demand that we're meeting which is a good thing.
And so we're going to continue to service, we are well positioned.
We've got the broadest product offering in the industry and all of those those streams are being pulled right now.
So I think this has legs for a good period of time, whether or not it continues at that pace. We will have to let a few things unfold to really understand the environment, but it's really good right now and we're taking advantage of it.
Got it thank you for your time.
Thanks, Josh.
Thank you we have no further questions at this time I would like to turn the call over to Mr. Keith Harvey for closing remarks.
Okay, well. Thank you very much for joining us today and I look forward to updating you during our second quarter 2022 earnings call in July everyone have a great day and thank you.
Thank you and thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
[music].